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Nifty, Sensex still not out of the woods: Monday closing report
Nifty has to close above 8,050 for the market to move higher
 
The Indian stock market on Monday was range-bound and closed marginally higher without any big rallies in important shares. Inflation data and the index of industrial production (IIP) announced by the government today were positives. Both Indian benchmarks, the NSE’s CNX Nifty and S&P BSE Sensex closed Monday at 8,013.90 or 0.39% up and at 26,586.55 or 0.61% up, respectively. Nifty opened the day at 7,986.60, reached a high of 8,057.70 and touched a low of 7,944.85. Sensex opened at 26,498.67, reached a high of 26,728.60 and touched a low of 26,307.84. India Vix was at 17.5250, up 0.27%. NSE volumes were at 63.34 crore in Monday’s trading.
 
According to the data released by the Indian government, core inflation has declined to -0.6% in May 2015 from -0.5% in April 2015. The Wholesale Price Index (WPI) based inflation inched up slightly to -2.4% in May 2015 compared with -2.65% in April 2015. Inflation for March 2015 has been retained unchanged at -2.33%. However, the WPI inflation remained in the negative zone for the seventh straight month in May 2015.
 
Inflation declined for primary articles and manufactured products, but an increase in inflation for fuel items mainly contributed to the entire rise in overall inflation in May 2015. Inflation of manufactured products declined to -0.6% in May 2015 from -0.5% in April 2015. Inflation of primary articles fell from -0.3% in April 2015 to 0.8% in May 2015. Fuel products inflation increased to -10.5% in May 2015 from -13.0% in April 2015.
 
While inflation data is positive for the economy, monsoon and agriculture news is less encouraging. India's farm economy could contract this fiscal year for the first time in over a decade because of drought, threatening Prime Minister Narendra Modi's drive to lift millions in the countryside out of poverty and bolster his party's support. Roughly, half of India's farmland lacks irrigation and relies on monsoon rain, but this year's rainfall is officially forecast to be only 88% of the long-term average and, for the first time in nearly three decades, farmers face a second straight year of drought or drought-like conditions. This comes on top of a crash in commodity prices, unseasonable rain earlier this year and delayed sowing late last year because of scanty monsoon rain.
 
On the issue of Cairn-Vedanta merger, Moody's Investors Service has said that Vedanta's (unrated) proposed merger with Cairn India (unrated) is credit positive for Vedanta Resources Plc (Ba1 negative). However, improved liquidity, lower advantage and reduced subordination within the group could lead to ratings being stabilised or current notching between the corporate family rating and the Ba3 bond rating being reviewed upon successful completion of the merger, it said. If the merger proceeds - subject to regulatory approval, in a cashless all-stock transaction - minority shareholders would receive one equity share and one 7.5% preference share in Vedanta for every share held in Cairn India.
 
Regarding exports from the service sector, there is news that the US government is investigating an outsourcing contract involving utility firm Southern California Edison and India's largest software exporters, Tata Consultancy Services (TCS) and Infosys, similar pacts signed now or recently are coming under the scanner, say reports. The latest contract to be scrutinised is one with Walt Disney, which recently signed a deal with US-based Cognizant Technology Solutions. Other recent deals with companies like Fossil are also being investigated, people familiar with the probes said. Industry body Nasscom said an investigation could have long-term ramifications on future contracts between US corporations and Indian IT firms.
 
There was some speculation in the forex market based on news from Greece. Most emerging Asian currencies slid on Monday after Greece and lenders failed to reach an agreement to prevent the country's default, while caution mounted ahead of a US Federal Reserve meeting, which could offer clues on the timing of a rate hike. The Philippine peso hit a 15-month low on concerns over more capital outflows. The Singapore dollar extended losses after the city-state reported the first quarterly decline in jobs in nearly six years. 
 
Coming back to Indian stock markets, Idea Cellular (up 3.20%) was the top gainer among Nifty stocks closing at Rs175.90. The top loser among Nifty stocks was Power Grid Corp, which declined 2.85% to Rs141.25.
 
Among BSE-100 stocks, the top gainer was JP Associates up 9.30% to close at Rs11.75 and the top loser was Bank of Baroda down 2.75% to close at Rs143.
 
European indices were trading sharply lower with FTSE 1.09%, Dax down 2.04%, on fears of default in Greece. 
 
US Futures were trading in the red.

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Economy & Nation Exclusive
Why should the banks take over bank defaulters?
Why should a secured creditor who is suffering default on his payment, be converted into the owner of the same third rate entity?
 
The Reserve Bank of India (RBI) has permitted banks to acquire management control in companies that are declared non-performing assets (NPAs) and have failed to come out this category even after availing of a highly dubious scheme of debt restructuring! What purpose is this going to serve? Under the existing legal provisions, banks can lease out such companies’ assets to someone else. Or, they can even sell the company to someone else.
 
I have never understood the logic of this move, which makes a secured creditor who is suffering default on his payment, to be converted into the owner of the same third-rate entity! I am further convinced that this route will be forced on nationalised banks and the quality of their balance sheets will further deteriorate rapidly requiring more capital infusion by the government for compliance with Basel III norms that will come into force shortly. As it is, government finances are not in good condition to re-capitalise banks. This is something that is being done every now and then. 
 
This remedy was used in India in the 1970s and 1980s, when the government of India under Indira Gandhi resorted to nationalising failed private sector companies absolving the promoters of their obligations. This was a drain on the national finances. Are we still refusing to come out this half- baked completely unsuccessful socialist era?
 
There are several issues involved in this. Companies become sick for reasons like bad planning, promoters being over ambitious, banks not doing the due diligence and accepting loan proposals and financing unviable projects, political interference in banking operations and because of adverse market conditions that are beyond the control of the promoters. In the case of the last reason, the companies naturally turn around, when business cycle for the sector improves. We have seen this in case of steel companies in early 2000.
 
Normally, banks seem to create their own NPAs. They are deficient in scrutiny of proposals, and then they are guilty of not keeping a close eye on these loans. It is incomprehensible that banks do not detect the weakness in the company till it is too late! 
 
If a business is found to be in trouble because of bad management then the lenders should opt to change the management and try to turn around the company. It would be better if we can create a mechanism where creditors will be allowed to find a buyer for the business through a transparent process. There have been cases where assets of distressed companies, when put on sale have been bought back at much lower prices by the erstwhile owners themselves through some shell companies that they controlled! 
 
This converting of loans into equity was a dirty trick used by banks. This was done in the case of Kingfisher Airlines not too long back with disastrous results. They actually converted loans at a premium to the prevailing market price! Has any banker been investigated this huge fraud? Has any banker been charged in this case for giving loans to the tune of Rs7,000 crore without any security? Has any politician been implicated for helping Vijay Mallya like this?
 
Converting failed loans to equity will only help corrupt bankers, who sanction these loans that have no merit and are clearly sanctioned for other “considerations”. So why do this?
 
You may also want to read…
 
 
(Prof Anil Agashe teaches at Symbiosis and other management schools in Pune).

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COMMENTS

Gupta

1 year ago

I am a banker. I believe this is a good move. Though at the face of it, this step sounds ridiculous, but it is actually beneficial to banks. As you mentioned, banks should have a right to sell and change management. The right to take over equity of this sick company exactly enables a bank to do that - to takeover and sell the company. The idea is not to takeover and sit on it. But under old rules, no such rights were available to banks. Moreover, in CDR forums, borrowers happily take huge haircuts from banks, which straight away go to enhance the equity value of the shareholders (including the promoters). So the banks were actually paying equity holders in a way, rather than equity taking the first loss. Now banks will have a right to take away that gain. Moreover, in genuine cases, when there has been a turnaround, shareholders made huge returns, whereas banks were never paid back the 'haircuts' that they took, which enabled the turnaround. This will no longer be possible as banks can share the gains. They are anyway the biggest losers when a company goes down. Whether they write off the debt or the equity, it is the same - losses won't 'increase' as a result of this move, but potential for gains does increase. And most importantly, in the good old days, the borrowers has nothing to fear when they defaulted. Now they will have some fear of losing their own company.... that fear itself will prevent some defaults. That will work better than expecting these dubious/silly/corrupt bankers from not lending to bad borrowers.

vswami

1 year ago

Add-on
Here is a look (or sound!)alike story from across the globe-
US Court Rules on the AIG Rescue (ICL Blog)> as noted therefrom,the US Federel has succeded in,as understood,through the route of nationalization, "even acquired ownership and control over several of them.[1]". A study in detail may keep the brain tuned up - 'oiled'/ 'lubricated'!

Pradeep Kumar

1 year ago

You forget this ia a part of natural life cycle of an INDIAN enterprise;that in INDIAN way of doing things, the law is allowed in only after the loot is secured away and the looters themselves have taken alibi and the exposes themselves are carefully orchestrated by themselves to cause least "damage"
So when the law has taken its course, the case is nicely packaged and settled clean, so that the poor chaps can sleep peacefully ever after.(forgive sarcasam, if any)

Puneet Arora

1 year ago

Sadly this article is just a rant without any line of reasoning against Strategic Debt Restructuring Scheme.

Dayananda Kamath k

1 year ago

To provide an avenue fot curruption. To avoid and to take controll of target company. One of the biggest readon for npa is over financing and non monitoring. For their inefeciency in banking they arr being rrwarded to dicide who will run the company

Parimal Shah

1 year ago

This is one mistake the GovernorRajan is making that is worstthan the QE I & QE2 etc.
-Parimal

REPLY

Pradeep Kumar

In Reply to Parimal Shah 1 year ago

Nobody is making any mistakes here. Nobody is a fool to reach that high positions.
They do their jobs to perfection.
What is imperfect is our assumption that they are there to work us,the CITIZEN's of INDIA.

Hemlata Mohan

1 year ago

Bankers are supposed to lend money and ensure its prompt repayment. By taking over a defaulting company, what we are actually saying is- start a company, take loans from the Bank, divert the funds , and then give an empty shell back to the Bank! And pray, does a bank know how to run various types of companies?Am I to believe that the bigwigs in RBI cant see through this fraud that could be played both by banks and companies?

vswami

1 year ago

OFFHAND
In the context herein, it ought not to be over sighted that a defaulting borrower could be a 'company' within its expanded concept , including LLPs and OMC. For that matter, a defaulter could also be an 'individual’, a partnership firm, or any other person. In any of those cases restructuring debt/take over of management control is unimaginable; the only option will be to fall back upon the property (ies) taken as security.
For complicity faced with and why apex court had to eventually come to rescue and bail out the lender-bank, for settling its claim against borrower through a process of adopting seemingly convoluted (not a straight forward reasoning / logic, the judgment of SC in re.Hill Proprieties Ltd. (reported on Indiakanoon website) calls for a pointed attention. For an insightful appreciation, a brief analytical study of that judgment may be found in public domain.

S.S.A.Zaidi

1 year ago

There are two types of errors in judgment regarding lending by banks
Type I Error
Making a loan to a customer who will
ultimately default
Type II Error
Denying a loan to a customer who would ultimately repay the debt.

It seems Most of the loans made are the victim of Error Type 1

Suketu Shah

1 year ago

One of the best articles you wl read.The solution of AJ is worst than the problem!The solution is a bad joke and wl negate the economic growth.

REPLY

Anil Agashe

In Reply to Suketu Shah 1 year ago

Thank you.

Parimal Shah

1 year ago

This may prove to be a fertile soil for corruption.
-Parimal

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